This dissertation examines two issues. One is does more convenient access to
safer deposit facilities affect the level and composition of the precautionary wealth
portfolio of credit-constrained rural households. The other one is the extent to which the
resulting changes in precautionary wealth may be linked to smoother consumption
patterns. This is accomplished by solving a dynamic stochastic model on wealth
portfolio choices. In the model, households make three decisions: how much to consume,
how much to save in a bank, and how much livestock to keep in the barn. Portfolio
decisions depend on the rates of return for each asset, transaction costs, and the impact of
systemic shocks on labor income, the price of livestock, and the expected return on
deposits–given the probability of bank bankruptcy.
Simulation results reveal how much increased access to deposit facilities,
measured in terms of a reduction in transaction costs, improves the ability of creditconstrained
households to insulate consumption from income variations due to systemic
shocks. This expansion of the outreach of deposit facilities will be more important for
household’s welfare the riskier is the environment where they operate. The simulation
results also show that effective financial regulation and supervision and the promotion of
robust financial institutions, which are less vulnerable to systemic shocks, create an
environment conducive to the holding of a greater share of precautionary wealth in the
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form of deposits. This reduces the costs for households of risk management and
consumption smoothing. It also improves the economy’s allocation of resources through
increased financial intermediation. The research sheds light on policy debates about
strategies for rural deposit mobilization.
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